This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
As the trading week drew to a close, one analyst opened up positions on two of the nation's largest consumer-electronics retailers. Just ahead of the weekend, megabanker Wachovia sneaked in a pair of "market perform" ratings on Circuit City (NYSE:CC) and Best Buy (NYSE:BBY).

Why the same rating on two shops of such different quality? The media doesn't explain Wachovia's reasoning, but I suspect that this morning's Consumer Electronics Association report may have had something to do with it. According to the CEA, fourth-quarter consumer-electronics shipments are expected to rise just 6% year over year, a much slower rate of increase than the 15% rise we saw last year. With the falling price of flat-screen TVs squeezing margins, the fear is that without significant sales volumes to give sellers economies of scale, profits will suffer. Add that specific risk to the more generalized fear of a faltering economy, and you get a viable "neutral" thesis for Wachovia.

Yet as one analyst with consume-electronics researcher iSuppli put it, "U.S. consumers have certainly shown a propensity to continue spending and to want their consumer electronics, by ... whatever it takes." Which raises the question: Is Wachovia being too pessimistic? Shouldn't it have more faith in the eternal ability of the U.S. homeowner to continually consume, consume, consume?

Let's go to the tape
To gauge Wachovia's skill at predicting how general economic trends affect the stock prices at specific retailers, we turn to CAPS for a glimpse of the analyst's past performance in the retail biz. Overall, the bank's record on CAPS is just so-so -- a 71.90 CAPS rating, burdened by a record of getting more calls wrong than right. But what about its record in retail, specifically?

Of course, Wachovia does get plenty of things right, too. Take, for instance:

Reviewing Wachovia's record, I get the impression that the firm's general record and its specific record in retail are pretty well aligned. The banker gets some things right, and some things wrong.

On Best Buy and Circuit City, though, I think Wachovia is getting both things wrong.

Foolish takeaway
Sure, the overall economy is looking pretty soft. But that's no reason to mark down both Best Buy and Circuit City as "average" stocks. There are major differences in quality here, folks. Circuit City hasn't earned a dime's worth of profit in the past 12 months, as measured by GAAP. From the perspective of cash profits, it's racked up nearly $50 million in negative free cash flow.

In contrast, Best Buy is profitable, with a below-market price-to-earnings ratio of 17 and $1.1 billion in free cash flow over the past year. With profit growth projected at 15% per year, it may not be the biggest bargain on the market, but the price seems fair for a company whose performance so far outshines its nearest rival.

In short, were I making the call, I'd be selling Circuit City and rating Best Buy -- what else? -- a buy.